“We consider that credit enhancements that would offset what we view as the now-reduced creditworthiness of the EFSF’s guarantors and securities backing the EFSF’s issues are currently not in place," the agency said in a statement.

Eurogroup chairman Jean-Claude Juncker says finance ministers will most likely discuss the implications of the EFSF downgrade when the next meet on January 23.
Photo: AFP

“We have therefore lowered to AA+ the issuer credit rating of the EFSF, as well as the issue ratings on its long-term debt securities."

While most euro countries guarantee the bonds issued by the EFSF, its rating depends on the AAA-countries. The remaining four do not make up enough guarantees to secure the fund’s 440 billion euro lending capacity.

S&P said that it could upgrade the EFSF back to AAA, if the eurozone offers new credit enhancements.

The EFSF was set up by the 17 governments that share the European single currency in May 2010 and has so far been used to provide emergency loans to Ireland and Portugal. It is also expected to contribute to a second bailout of Greece.

The fund has an effective lending capacity of 440 billion euros, which depends on guarantees, mainly from the euro zone’s AAA countries, only four of which now remain after France and Austria were downgraded last week.

LENDING CAPACITY INTACT: EFSF

In a statement, the EFSF said the downgrade would not affect its lending capacity, and emphasised that its short-term rating remained at S&P’s top level.

“The downgrade to ‘AA+’ by only one credit agency will not reduce EFSF’s lending capacity of 440 billion euros," the fund’s chief executive, Klaus Regling, said.

“EFSF has sufficient means to fulfill its commitments under current and potential future adjustment programmes until the ESM becomes operational in July 2012," he added.

The ESM - the European Stability Mechanism - is a permanent rescue fund that is expected to have an effective capacity of 500 billion euros, based on paid-in capital of 80 billion euros and callable capital of 620 billion euros.

However, details about the structure of the ESM have still not been agreed among all euro zone member states. The original plan was to introduce it in July 2013, but that was brought forward by a year. Now eurozone policymakers are working hard to ensure the ESM can come into effect in just six months time.

Jean-Claude Juncker, the chairman of the Eurogroup, which represents the 17 eurozone countries, said the implications of S&P’s decision would be discussed, probably when finance ministers next meet on January 23.

In contrast to S&P, Moody’s has opted to maintain France’s triple-A credit rating in a decision overnight.
Photo: AFP

“We take note and will examine the consequences of the decision announced by Standard & Poor’s to downgrade the credit rating," he said in a statement.

“EFSF continues to be assigned the best possible credit rating by Moody’s (Aaa) and Fitch (AAA), underlining its solidity. Neither rating agency has indicated any rating action for EFSF in the immediate future."

EUROPE RENEWS ANTI-RATINGS AGENCY PUSH

Ahead of the EFSF downgrade, European leaders hit back at Standard & Poor’s Friday downgrades.

Speaking as the chair of the European Systemic Risk Board, European Central Bank head Mario Draghi said it’s time for investors and regulators to rely less on ratings agencies, telling a committee of the European Parliament that “one needs to ask how important are these ratings for the marketplace, for the regulators and for investors".

Draghi also noted that downgrades had largely been anticipated by markets and said that “as regulators we should learn to do without ratings". Or people could use ratings as just one piece of information “rather than spend too much time on what they say or do".

The European Commission also hit out at the S&P downgrades, saying the rating giant wrongly took the EU debt crisis response as being only about austerity.

The European Union executive has also said that after Friday’s decision, which also removed Austria from the list of gold-plated eurozone nations, it is “encouraging" EU governments to ban the ratings agencies from passing judgment on countries under bailout and reform programs.

Senior economic spokesman Olivier Bailly said the idea that Europe was “pushing a strategy based on the perspective of fiscal austerity alone was a serious misperception".

He said EU leaders, who will meet at a summit January 30 to agree on a pact calling for balanced government budgets and to discuss how to reduce youth unemployment, were working on a “twin strategy based on smart consolidation and structural reforms".

He said moves to boost growth and employment were “being implemented and now delivering results".

As a result, S&P’s decision to downgrade nine of the 17 eurozone nations, was “very odd as far as the timing was concerned".

He accused the ratings agencies of taking decisions without being in possession of the full facts, citing monthly updates on “exact" public finances shared among EU capitals “on a confidential basis".

While insisting that governments had “no margin of manoeuvre for fiscal impetus", he said reforms to labour or energy markets, for instance, did provide a way forward.

Turning to proposals to tighten regulation of the agencies suggested in November by EU markets commissioner Michel Barnier, Bailly said there was renewed debate within the executive about “not taking into account analyses of countries in programs".

He was referring to Greece, Ireland, Portugal and - depending on talks also involving the IMF - non-euro Hungary. Over time, that stance could also apply to bigger eurozone countries whose debt sustainability may become an issue.

With talks starting in the coming weeks between EU governments, and also involving the European Parliament, Bailly said the Commission was encouraging the Danish EU presidency to work with governments on this idea.

MONTI BLAMES DOWNGRADE ON GOVERNANCE

However, technocrat Italian Prime Minister Mario Monti has taken a more moderate stance on the S&P action, saying that insufficient governance in the eurozone led the ratings agency to downgrade the creditworthiness of nine countries, including Italy.

Italy’s rating was cut two notches to BBB+, putting it at the lower end of investment-grade debt.

The agency’s decision “points to inadequate governance within the eurozone as a risk factor", Monti told journalists after a meeting with the European Union’s President Herman Van Rompuy on Monday.

Monti also noted that Standard and Poor’s had also commented “with a lot of emphasis, I have to say, the positive side of ongoing action taken by the Italian government."

Since taking power in mid-November, Monti has pushed through a draconian austerity plan and is now looking at a massive liberalisation program as well as reforms of the job market.

In exchange, the Italian premier is pressing for EU partners to reinforce the eurozone’s rescue funds.

Van Rompuy welcomed the “extraordinary work President Monti and Italy is carrying out."

Italy is heading in the right direction, said the EU president, before joining the call for emergency rescue funds to be boosted.

Moody’s cited the economy’s overall strength but said growth prospects present “risks to the French government’s fiscal consolidation plans".

Moody’s said in a statement on Monday that it “will update the market during the first quarter of 2012 as part of the initiative to revisit the overall architecture of our sovereign ratings in the EU".

EUROPE FACES UNPRECEDENTED CRISIS: SARKOZY

Moody’s decision came as French President Nicolas Sarkozy warned Europe is facing an “unprecedented crisis". But the under pressure PM also urged calm over S&P’s downgrades.

Sarkozy issued the warning in Madrid where he was the first foreign leader to meet with Spain’s new conservative prime minister, Mariano Rajoy, since he was sworn in on December 21.

“We are confronted by an unprecedented crisis that forces us to cut spending, lower our deficits but also to find the path to new growth by resolving our competitiveness problems," Sarkozy said, adding that the impact of the S&P downgrade of France’s credit rating “changes nothing:.

“Fundamentally it changes nothing," Sarkozy said. “We have to reduce our deficits, cut spending, improve our countries’ competitiveness to rediscover growth," he said, calling on people “not to panic" and to “react to these decisions by keeping our cool".

“I don’t plan to take into account what this or that person says," the French leader said, nevertheless describing the agencies’ ratings as “interesting elements".

Spain’s leader, holding his first news conference since he took power, agreed.

“In the end, the most decisive thing is that each country follow its own path," Rajoy said.

The new right-leaning Spanish government has announced 8.9 billion euros in budget cuts, tax increases to bring in 6.28 billion euros and an anti-tax fraud battle to recoup another 8.17 billion euros.

Rajoy said at the weekend that Spain, which declared a towering 21.5 per cent unemployment rate in the third quarter of 2011, now had an “astronomical" figure of 5.4 million jobless.

The Spanish leader gave his support to the French-backed scheme to impose a tax on financial transactions.

“Spain will support this tax," Rajoy said after the talks with Sarkozy, who was in Spain to be awarded the Order of the Golden Fleece for helping Spain in its fight against armed Basque separatist group ETA.

GREECE DISPATCHES OFFICIALS TO US

But while France urged calm, concerns over Greek debt talks continued to mount as Greece sent senior officials to Washington for meetings with the International Monetary Fund to break a deadlock in debt swap talks that has prompted new fears of an unruly default.

Barely a month after an injection of bailout funds helped avert bankruptcy, Greece is back at the centre of the eurozone crisis as fears of a default and a subsequent euro zone exit overshadow a mass credit downgrade of eurozone countries.

Athens needs a deal with the private sector within days to avoid going bankrupt when 14.5 billion euros of bond redemptions fall due in late March. But talks with its creditor banks broke down without an agreement on Friday.

“There is a little pause in these discussions. But I am confident that they will continue and we will reach an agreement that is mutually acceptable in time," Greek Prime Minister Lucas Papademos told CNBC television.

He said talks on both the debt swap and the latest bailout must be completed over the next two to three weeks.

“This is the objective. I think the conditions are in place in order to do so," Papademos told the broadcaster.

A deal with the banks must be sealed before senior inspectors from the EU, IMF and ECB “troika" arrive in Athens next week to finalize a second, 130-billion-euro bailout.

The banks say Athens is not the problem in the talks, suggesting the issue lies with terms insisted on by foreign lenders keeping Greece afloat with aid.

In a bid to resolve the impasse, a government source said the head of Greece’s debt agency and a senior adviser were travelling on Monday to Washington to meet IMF officials - just a day before a team of technical experts from the troika arrives in the Greek capital.

Under the bailout terms agreed in October, Greek privately held debt would be reduced by half so that, together with structural reforms, the overall debt to GDP ratio of Greece would fall to 120 per cent in 2020 from 160 per cent now.

MARCH BOND DEADLINE LOOMS LARGE

Charles Dallara, head of the Institute of International Finance who represents Greece’s private creditors, told the Financial Times an agreement in principle was needed by the end of this week if it was to be finalised in time for the March bond redemptions. He said the Greeks were not the problem.

“All the European heads of state said they wanted a deal with a 50 per cent (haircut) and a voluntary agreement," Dallara was quoted as saying. “Some of their own collaborators are not following that decision."

After initial optimism last week that a deal was near, negotiations stalled on Friday over the interest rate Greece must pay on new bonds it offers.

One banking source said official sector creditors had asked for a coupon of less than 4 percent, irking banks for whom it would have meant losses of over 75 percent on the bonds.

A second source said the banks were ready to strike a deal if they reached common ground with the EU, IMF and ECB.

Greece has continuously missed its fiscal targets and the latest impasse in talks has prompted speculation that the country may need further financial support to put its debt on a viable footing.

In its fifth year of recession, Greece has repeatedly flirted with bankruptcy in recent months, with only bailout loans from European partners and the IMF agreed on condition of unpopular austerity measures preventing a default.

Papademos played down speculation that Athens would need additional aid to that agreed at a euro zone summit in October.

“I think the funds that have been pledged at the Euro Summit, combined with the outcome of the private sector involvement process should be sufficient in order to support financially the Greek economy," Papademos said.

Bill Gross, the manager of the world’s largest bond fund PIMCO, said in a Twitter post that the Standard & Poor’s downgrades had made investors “aware" that countries can default and Greece would be the next example.